Canadian Natural’s $3.13B deal for Devon Energy marks comeback for Canadian energy sector

It takes a lot of nerve to increase exposure to long-suffering Canadian gas. But Canadian Natural Resources Ltd. did just that Wednesday by purchasing the Canadian conventional business of U.S independent Devon Energy Corp. for $3.13-billion in cash, breaking a long streak of foreign oil and gas purchases and signaling the Canadian energy story is making a comeback.

Canadian Natural beat out a crowded field of interested buyers in the largest acquisition by a Canadian energy company since Suncor Energy Inc. bought Petro Canada for $22.9-billion in 2009.

“It’s going to be an extremely active M&A year in Western Canada,” predicted Adam Waterous, vice-chairman and global head of investment banking at Scotia Waterous, which advised Devon and spent Wednesday morning consoling unsuccessful bidders.

“We are seeing ferocious demand on the part of buyers,” both Canadian and foreign, he said. “The capital markets have become very supportive of the oil and gas industry.”

Both companies’ shares gained on the deal. Devon’s stock was up 2.13% to close at US$64.25 in New York, while Canadian Natural shares jumped 3.7% to close at $40.63 in Toronto.

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Mr. Waterous said Canadian energy companies are returning to the acquisition scene. In addition to Canadian Natural’s deal with Devon, Calgary-based Baytex Energy Corp. on Feb. 6 acquired Aurora Oil & Gas Ltd., a player in the Eagle Ford shale oil field in Texas, for $2.7-billion.

In recent years, M&A activity has been dominated by Asian companies looking to expand in North America. Canadian companies, battered by low commodity prices, operational setbacks, stood on the sidelines or became the hunted.

The Asian spree lost steam after Prime Minister Stephen Harper toughened rules on the sale of oil sands assets and as many Asian players became worried about delays to build pipelines and liquefied natural gas plants.

Many gas assets failed to attract buyers.

“There was a fair amount of investor skepticism on the company’s ability to sell the assets at a decent price,” RBC Capital Markets analyst Scott Hanold said in a note to clients. “We had expected an after-tax range of $2-3 billion and an agreement around mid-year 2014, so the sale was quicker and at the high-end of our expectations.”

Steve Laut, president of Canadian Natural, said the “opportunistic acquisition” was motivated by the assets’ quality and complementarity with those of his own company, the potential to boost higher value light oil and liquids-rich gas, and synergies from combining the two operations.

The sale was also the largest involving oil and gas assets in Canada, when measured by production. Devon’s fields in Alberta and British Columbia produce 87,000 barrels of oil equivalent a day — 73% of it natural gas.

The last top asset deal was in 2006, when another U.S. independent, Anadarko Petroleum Corp., sold its Canadian business, also to Canadian Natural. The assets produced 68,000 boe/d.

Canadian Natural knows the Devon properties so well “we have home field advantage,” Mr. Laut said.

The two companies’ royalty-generating lands could be combined to create a new entity that could be spun off, generating additional upside for shareholders, he said. Competitor Encana Corp. is planning a similar spinoff of its Alberta freehold lands this year.

“Going forward, we do see that storage is down significantly this year, and the strip is telling us a little bit about the market, and we think it will take quite a bit of time to get storage filled up, so 2014 and potentially into 2015 looks like pretty strong gas pricing,” he said.

Canadian Natural is anticipating it will generate plenty of cash flow this year, enabling it to continue to invest in its oil sands business.

Devon put its Canadian conventional business up for sale last November as part of its transition away from natural gas and into more profitable oil.

It also needed money to help pay for the purchase of GeoSouthern Energy Corp.’s Eagle Ford assets for US$6-billion.

The focus on oil has meant it was underinvesting in its Canadian conventional business.

With the sale, Devon’s Canadian unit will be dedicated to increasing its oil sands and cold flow heavy oil.

In addition to buying the assets, Canadian Natural said it’s hiring Devon’s 900 Devon field and head office employees, a sweet outcome in a market rocked by layoffs at competitors such as Encana and Talisman Energy Inc., also re-inventing themselves to focus on their best properties.

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